‘Jeopardy assessment’ gives taxman new power

THE Tax Administration Act introduces jeopardy assessments, a new concept in our law that requires some closer attention. Such assessments are described by tax experts as potentially "quite invasive”.

The act becomes effective on October 1, replacing large parts of the Income Tax Act, the Value Added Tax Act, and other acts administered by the commissioner of the South African Revenue Service (SARS). Nina Keyser, a tax partner at law firm Webber Wentzel in Cape Town, says her concern is the lack of a proper definition for jeopardy, coupled with a lack of case law in SA on what the circumstances for jeopardy are.

She says the act provides for such an assessment if the commissioner of SARS was of the opinion that the collection of taxes was in jeopardy. He could then issue an assessment even before the taxpayer was due to file a tax return.

There are no regulations setting out the circumstances in which a jeopardy assessment can be raised, but SARS has issued a guide. According to the guide the commissioner may permit a jeopardy assessment if SARS receives information that a taxpayer is placing assets outside of its collection powers, or in instances where the taxpayer is being audited and SARS detects a movement of assets out of the taxpayer's asset base, or where a taxpayer is about to leave the country.

A guide on the Tax Administration Act SARS issued last month says since the purpose of the assessment is to raise the liability urgently, the assessment may be an estimation based on information readily available to SARS.

Such an assessment may be issued without following the ordinary audit route, but the reason for the assessment will be stated on the notice.

Ms Keyser says: "So they are assuming that even before you had the opportunity, or the obligation to submit a tax return, that you are going to cheat on your taxes, which is really quite an assumption.”

It can be equated to arresting people sitting in a bar, assuming they are all going to drink beyond the legal limit and drive.

In the May newsletter of the South African Institute of Chartered Accountants, Ernst & Young said it was clearly a drastic measure to raise a jeopardy assessment before any tax return was due.

It referred to a case in the UK courts that gave some insight into the interplay between the assessment process and the risk that a taxpayer might dissipate assets, without making a direct link to jeopardy assessments.

Ernst & Young said some of the factors the commissioner will have to consider before deciding to raise a jeopardy assessment are the merits of the case to be contested at a later stage, the taxpayer's history of compliance, the quantum of the assessment and how it compares to the taxpayer's resources.

The assessment can be taken on review to a high court on the basis that the amount is excessive, or that the circumstances on which SARS justify the making of the jeopardy assessment do not exist, SARS says in its guide.

Ms Keyser says taxpayers may object to the jeopardy assessment, assuming that the pay now, argue later principle will apply. However, it will be a daunting task for the taxpayer to prove the assessment was incorrect if it was issued in the middle of a tax year.

She says a company can have a capital gain early in the tax year, and a technical profit, but it will also have expenses that can be used to offset its tax liability.

The taxpayer may argue that the assessment is excessive. But that will imply that he was going to cheat, but he would not have cheated as much as stated in the assessment, Ms Keyser says.

According to the guide the onus will be on SARS to prove that the making of the jeopardy assessment was reasonable. "It will be crucial to understand what is meant by jeopardy, and in which circumstances such an assessment will be raised,” Ms Keyser says.

Tax experts may find working out the boundaries entertaining, but it will not be entertaining to those who want to do business, she says.

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